The Importance of Getting E-Invoicing Tax Right the First Time

More than 60 countries have announced, or already require, e-invoicing for tax reporting. The rapid adoption is being driven by governments and their desire to reduce the tax gap, or the amount of expected revenue versus what tax is actually collected. In the EU, for example, the value-added tax gap in 2020 was estimated to be £93 billion ($116 billion).

At the same time, tax authorities are in the midst of a digital transformation. With tailwinds fueling e-invoicing adoption, and the movement away from historical summary tax return reporting, it’s critical that businesses get tax right on every transaction in real time.

A growing trend is the convergence of accounts receivable and payable processes with tax reporting. E-invoices are digital documents with structured data that can be read by machines. Tax and transactional data from an e-invoice are sent to tax authorities in real time, usually as part of the e-invoice issue and exchange process.

How e-invoicing is handled for tax reporting varies by country and generally follows one of three models.

• Real-time reporting: In this model, the tax authority isn’t directly involved in the transaction between the two trading partners, so suppliers can pass the invoice to the buyer without government approval. However, a subset of the invoice data must be sent to the tax authority, which gives them greater visibility into business transactions. Hungary RITR is an example of a real-time reporting model.
• Clearance: Here, invoices are cleared by a tax authority and sent back to the supplier before they can be issued to the buyer. Brazil’s Nota Fiscal Eletrônica is an example of a clearance model.
• Centralized: Under this model, invoices are sent to a tax authority for clearance and approval, then issued to directly to the buyer through the authority’s platform or portal. Italy’s Sistema di Interscambio is an example of a centralized model. We’ll see a similar model in Poland in 2024 with the new Krajowy System e-Faktur platform.

Getting tax correct on every transaction has always been critical to getting and staying compliant. There’s a great need for accuracy under e-invoicing because of the timing of tax data being exchanged.

Greater Visibility

Under e-invoicing, both sides of a transaction can be seen and compared. The tax authority may be able to compare a sales invoice issued with the purchase invoice received, ensuring symmetry between the output tax charged (the VAT charge and collected) and the input tax credit claimed by the customer.

In many jurisdictions, the tax authority can see the VAT liability or exemption that substantiates the tax—or lack of it—on an invoice by using specific harmonized tax codes within the invoice schema. Further, tax authorities can run their own data analytics and logic checks to identify errors in the tax determination.

They also can apply automated checks on the e-invoice at the time of issue and clearance, including arithmetic checks, syntax and format checks, as well as validate a supplier’s authenticity through digital signatures and tax identification numbers. Ultimately, if a customer’s VAT registration is incorrect, incomplete, or missing, the e-invoice may fail at the start.

For businesses, this increased visibility into every transaction means there’s no room for error in tax calculations. Technology enables tax authorities to spot errors, issues, and inconsistencies on every invoice. Additionally, there’s no room for data or transposition errors on an e-invoice due to automated posting when it’s received.

The real-time nature of e-invoicing and reporting means that once an e-invoice is issued, it underpins the entirety of tax reporting for a business. Tax compliance is no longer a standalone parallel process—it’s now aligned as a business as usual finance process. The tax authorities will use e-invoices as the source of truth for everything when it comes to a business’s tax compliance.

Automation Benefits

While new for some businesses and complex for many, e-invoicing isn’t all doom and gloom. It actually is helping modernize and bring tax reporting processes more in line with the processes used by businesses worldwide. Still, businesses should make process and technology investments to ensure the tax is right on every e-invoice.

It’s important for businesses to consider global and scalable e-invoicing solutions. To date, the go-to for many businesses have been local solutions that take a tactical approach to e-invoicing on a country-by-country basis. But as businesses expand and e-invoicing mandates continue to pop up, point solutions for each country will quickly become burdensome and costly.

Businesses also can adopt tax automation tools such as tax engines to calculate tax right first time at the point of invoicing, as well as indirect tax reporting solutions. the fast-paced nature of e-invoicing makes tax automation even more appealing. Because transactions happen 24/7, automated solutions can help ensure businesses are calculating the right amount of tax and supplying the correct tax data for each e-invoice.

Additionally, automated solutions can streamline the e-invoicing reporting process through the use of integrated systems and direct data transfer. This also allows for reconciliation between e-invoicing and VAT reporting.

E-invoicing is posed to spread. While many countries will adopt their own requirements, there is movement to bring harmony through widespread adoption of standard e-invoicing networks such as Peppol and the use of hybrid PDF/A3 formats for invoices. Regardless of how e-invoicing evolves with time, the need for accurate tax determinations will only increase, so creating a plan and adopting technology today will set businesses up for success in the future.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Alex Baulf is senior director for global indirect tax at Avalara.

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